Gordon Campbell on why tax cuts in 2017 would be a (proven) bad idea

Ever since the world fell prey to the mullahs of the free market in the 1980s, no amount of real world evidence has managed dispel one key tenet of their economic faith. Namely, the idea that if you cut income taxes and taxes on small business, a wave of individual enterprise and entrepreneurial energy will thus be unleashed, profits will rise and – hey bingo! – the tax cuts will soon be paying for themselves via all that extra economic activity that this virtuous cycle will have set in train.

Ahem. One small problem: the formula doesn’t seem to work. Undaunted, Donald Trump appears intent on uncorking this magic potion yet again – despite the previous tax cutting disasters initiated by George W. Bush and earlier, by Ronald Reagan. (Reagan not only backpedaled on his tax cuts after their disastrous impact became obvious, but the rate of increase in government sending to GDP on his watch was actually double the rate of increase under Ford/Carter. Somehow, the Reagan myth endures.)

Basically… what tends to happen is that deficits soar, and social services get cut in the subsequent scramble to make up for the missing revenue. You could say that the combo of income tax cuts and corporate tax cuts are the best example of Gore Vidal’s old maxim that the US is very, very fond of prescribing socialism for the rich, and capitalism for the poor.

Enter, Kansas

The really compelling modern evidence that the magic potion doesn’t work is the state of Kansas under the economic policies of its far right, tax-cutting governor, Sam Brownback. Bloomberg News has just updated how badly things are faring:

Like President-elect Trump, who said on the campaign trail that slashing taxes would jump-start growth, Sam Brownback in 2012 said steep cuts to personal income and small-business taxes in the Midwest state would provide the economy a“shot of adrenaline.” What followed wasn’t the promised jolt. The shortfall in revenue has instead forced the government to curtail spending on everything from health care to higher education…

Brownback’s experiment offers a cautionary tale for Trump, who has placed tax reform as a central part of his strategy to more than double the pace of economic growth and add millions of well-paying jobs to the labor force.

Brownback has tried to staunch the flood of bad news from his experiment in Tea Party economics by hiding the quarterly updates on Kansas’ economic performance. Check the indices in the last report before the cloak came down in 2015 though, and you could already see that Kansas lagged badly in comparisons with the region, and with the US a whole, two years after the tax cut magic was unleashed.

Two subsequent leaked Kansas governor’s reports referred to in this recent LA Times update contain no better news.

They painted a “doom and gloom scenario” in which the gross state product had declined from 2014 through 2015, and that growth in personal income, nonfarm employment and private industry wages all trailed the region and the country as a whole. Sales tax collections were up, but that’s because Brownback enacted two sales tax increases to compensate for his other tax cuts. The general effect was to burden the middle class and poor with costs that wealthier Kansans escape.

Why should we care? For two main reasons. One, Trump is about to re-inflict these loony ideas on a US economy that has finally been hauled out of the GFC that was triggered by the last madcap round of banking and financial de-regulation, and by a tax cutting regime under George W. Bush that had caused the housing bubble to explode. Secondly, and more importantly, New Zealand is about to enter an election campaign that’s expected to be dominated by a debate on the merits of tax cuts vs spending on social services.

On all the available evidence, the benefits from tax cuts are (a) ideological and (b) political. They do not make economic sense, and they are socially irresponsible. The tax cuts are likely to fuel the housing bubble, and will cause a spending spree that will make it imperative for the Reserve Bank to hike interest rates in order to counter this tax cut fuelled inflationary spike. In other words, any gains from the tax cuts will be largely illusory for all but the most wealthy among us, and they will drain away the revenue that was needed (b) to counter our existing social deficits in health, housing and education, or (b) to foster sustainable economic development. Yet, as the recent LA Times report on Kansas indicates, policy makers are addicted to tax cuts:

The Kansas experience is important because the notion that dramatic tax cuts pay for themselves by spurring economic growth still unaccountably has an allure for conservative policymakers, despite overwhelming evidence to the contrary. ….The tax package Brownback enacted in 2012 cut the top personal income tax rates sharply. The rate on income under $30,000 was pared to 3% from 3.5%. Pass-through business income was made fully tax-exempt. The law increased the standard deduction, but also eliminated several tax credits that assisted the poor.

In follow-on changes the next year, the top income tax rate was cut further. But other cuts were reversed, effectively raising taxes for the middle class and working class. In all, as was documented by the Washington-based Center for Budget and Policy Priorities, the changes cut the taxes of the wealthiest 1% of Kansans by 2.2% and raised them for the poorest 20% by 1.3%.

It should go without saying that far from paying for themselves, these cuts have blown a huge and growing hole in the state budget. Income tax collections are more than 22% below their pre-cut levels. Schools, universities and road repairs all have taken a hit in spending…The Kansas economy has lagged behind the U.S. and neighboring Missouri for years…..California, has the reputation for being a spendthrift but has gotten its fiscal house in order by raising taxes.

Keep Kansas in mind this year when our politicians begin to try to sell the notion that tax cuts are a responsible form of economic management. They’re not. They’re a bag of sweets, a bribe to win your vote. Beyond the sugar hit, they’ll do nothing to fix the problems facing the country, and will also do nothing to make this country safer or more prosperous for your kids.

Wrong Road Again

And here from the mid to late 1970s – which was about when those Treasury rebels were coming under the sway of Milton Friedman – is Crystal Gayle, singing her heart out about the allure of tax cuts, even when you know they’re so very, very wrong.

14 Comments on Gordon Campbell on why tax cuts in 2017 would be a (proven) bad idea

  1. The Gnomes of Wall Street are at it again – John H

    Bloomberg Newswire

    Trump Tax Cuts Could Jump-Start Global Economy, World Bank Says

    by Andrew Mayeda

    11‎ ‎January‎ ‎2017‎ ‎10‎:‎00‎ ‎a.m.

    Global growth would be boosted by corporate, personal taxes

    World economy grew at slowest pace last year since crisis
    President-elect Donald Trump’s tax cuts and spending plans could deliver a shot in the arm to the U.S. economy, lifting growth around the world, although uncertainty about his trade policies adds to the risks, according to the World Bank.

    The Trump administration could squander the economic gains of fiscal stimulus if it imposes new trade barriers that provoke retaliation by other countries, the Washington-based development lender said Tuesday in the latest update to its global economic outlook.

    Overall, it’s too early to assess what the net impact will be of Trump’s economic policies, the World Bank said. Accordingly, it left its forecast for U.S. growth this year and next unchanged, at 2.2 percent and 2.1 percent, respectively. The outlook doesn’t incorporate the expected effect of Trump’s policy proposals, according to the report.

    The bank projects the world economy will grow 2.7 percent in 2017, down 0.1 percentage point from its forecast in June. Stalling trade, weak investment and heightened policy uncertainty have dampened global economic activity, pushing growth down to an estimated 2.3 percent last year — the slowest rate since the financial crisis.

    The World Bank estimates global growth will pick up to 2.9 percent next year, also down 0.1 percent from its June call.

    Brexit Uncertainty

    The development lender sees the euro zone expanding at a 1.5 percent rate this year with uncertainty lingering as the U.K. starts negotiations to withdraw from the European Union, which will weigh on growth this year and next. Japan is seen growing 0.9 percent this year, while China’s output is set to expand 6.5 percent, the World Bank said.

    U.S. growth could accelerate to as much as 2.5 percent this year and 2.9 percent in 2018 if the Trump administration follows through on a pledge to cut the corporate income-tax rate from 35 percent to 15 percent, and slash individual rates, the World Bank estimates.

    “When you have this combination of tax cuts, you have a positive outcome on investment and personal consumption,” Ayhan Kose, director of the bank’s Development Prospects Group, said in an interview.

    A U.S. pickup on that scale would boost global growth by 0.1 percentage point in 2017 and at least 0.3 point next year, depending on the timing of the tax cuts and the response of the Federal Reserve, according to the development lender.

    The World Bank said Trump’s plan to boost infrastructure spending could also lift growth, but it cautioned that the benefits could be offset if overall federal spending falls.

    Trading Partner

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    The U.S. is the biggest trading partner for about a quarter of the world’s nations. As a result, efforts by the U.S. to renegotiate trade deals and impose new barriers could set back the global economy, the World Bank said. Trump, who will take office on Jan. 20, focused on trade during his campaign for the president, saying he’ll rethink trade relations with China, renegotiate or withdraw from the North American Free Trade Agreement and keep the U.S. out of the Trans-Pacific Partnership agreement.

    “Whenever a country imposes a trade restriction, on the other side of the table the country might impose policies as well, and that could escalate the conflict,” Kose said

  2. The nations economy is controlled by a private banking cabal(you omit the fed reserve, the contraction of money and the currency manipulations and (hello economy ) there is the central banking system).
    @john You think the power to create money from nothing, or the 17.8 trillion debt is not of bigger interest in the US economy.
    The whole economy is controlled by the banksters.
    The banks funding sets the economy.

  3. The banks make nations borrow in the name of the taxpayer, this odious debt comprises of wars and private corporation’s infrastructure, bank and corporate bail outs, costs of running the Crown .
    Taxes go to pay the Crown’s odious debt which they have fraudulently used the people’s name( tax) as security.
    Follow the money, every act of terrorism was funded by the banking cabal(some through shell companies). They want to blame a nation for funding terrorism but no nation with a central banking system creates its own money.

    Continuing to have the Bank’s Crown entity as a govt is a BAD idea.

  4. So Anabel, if you fall ill tomorrow, and are hospitalized in Nu Ziland, my understanding is that you will not be billed for these services. Am I right? So who pays for these Doctors, hospitals, and medical equipment?
    It’s New Zealanders tax…correct? Help me with why this is “wrong”?

  5. Tax is not so much “legalised” theft as as combining resources to provide infrastructure and services individuals couldn’t make or provide on their own – (people who hate tax should go and build their own roads, organise their own sewage, organise their own clean drinking water – deal with health epidemics on their own etc – and just to point out their are lots of countries with low tax collection and small government – it’s called the “third world” and it doesn’t work very well in practice…

  6. Dennis the banksters propagandist. If you were from Otaki like you said you would know in NZ people pay $40 up to $160 for a dr appointment. About $80 for a dentist and a small fee for every overpriced prescribed drug.
    The Crowns bludget , and not taxes, pays for the Crown’s health, for its many useless and costly DHBs and for the accountants that now run the hospitals .
    The Crown’s ‘health’ system in its yearly bludget is a smaller amount than what it borrows yearly to pay to “debt and transfers” (which is on top of what it takes in taxes) .

    You may well ask why would any sovereign nation like NZ have to borrow money from private bankers? We don’t have a sovereign nation, we have a bankster governed Crown NZ govt.
    Taxes go to the Crown, which is the bank of England’s private entity.
    The Crowns revenues are higher than its spending.

  7. Yes, I paid NZ$60 to go a Doctor in Wellington, and NZ$187 to have my teeth cleaned (which I thought was a little steep) and NZ$5.00 for my blood pressure meds (which would have cost me nearly US$100 in the States). But if I have a heart attack, or a serious head injury in a car accident, or get cancer, my understanding is that I will receive this hundreds of thousands of dollars of hospitalization and treatment for free.(And in the States I have to pay a US$10,000+ yearly premium for the same “free” treatment. Do you pay a $10,000 health insurance annual premium Anabel?

    My dear, you do not have a clue how good you have it in little ole’ “undemocratic” Nu Zilland! Just like it seems you have no clue about basic economics, taxation, and how social welfare works.(Who pays for the NZ police Anabel….the taxpayer I thought.)
    And I guess I’m just not smart enough to understand your bankster/Crown NZ govt/Bank of England private equity/private bankers/bludget(?) conspiracy theory. LOL
    I’m sure Bill English is waiting for you to have a meeting with the cabinet and show those ignoramus’s how NZ can have no taxation.

  8. Anabel, if you are lucky enough to have a good job in the USA that provides you with Health Insurance, the American Academy of Actuaries reported that in 2016 Annual premiums for employer-sponsored family health coverage reached $18,142, up 3 percent from last year. With workers on average paying $5,277 towards the cost of their coverage.
    Pretty bloody expensive for both your family, and your employer!

    If you don’t have a benevolent employer, or are self employed, or unemployed, your family would spend an average of 10.1 percent($6,422) of their income on health insurance premiums and deductibles in 2016. (Why 50 million Americans have little or no Health Insurance, even under Obamacare.)In Mississippi, which has the lowest median income, families were at risk of spending 14.7 percent of their income on health insurance costs. In Arizona, Florida, Mississippi, New Mexico, Oklahoma, Tennessee, and Texas, families could pay 12 percent or more. And all these Insurance policies have huge deductibles. For any hospitalization, these families have to pay usually $10,000 of the initial cost before their insurance kicks in. It sucks!

    I think that any thinking Kiwi will recognize that the small amount of tax they pay for their excellent NZ healthcare is nothing compared to that faced by poor American families. As I said, you have no idea how good you have it.

    If you

  9. Money for infrastructure (that we already have) and money for the set up of the Crown’s energy monopoly was all privately borrowed with interest in the people’s name.
    Why did the govt not create the money for the public needs (*and for Genesis, Transpower and hospital infrastructure) without interest.
    The public don’t own the infrastructure they paid for or the Crown’s assets, (have you never had a bloody power bill) there is no “sharing of resources” .There are just Crown monopolies protected by the Crown’s commerce commissioner.
    Every year in the budget the Crown nz govt borrows money in the people’s name for ” debt and transfer “to the tune of about the amount the Crown spends on maintaining its ailing health monopoly and many DHBs.
    We all see the Crown has money to spend on its jet setting Crown ministers , a fortune to its foreign owned corporations and companies but for the people just a cake of hard to swallow austerity and debt. A sovereign nation would create the money themselves instead of borrowing with interest from the global banking cabal/banksters.
    Tax is private property that is taken by force by the Bank of England’s Crown.
    Its not low taxes that make a nation “third world” . The Bank of Englands Crowns slavery and exploitation in certain nations such as Africa. Where the Crown and its corporations have set up conflicts, have enslaved the people and subjugated the people to their knees, exporting their food to the UK for cents on the dollar while many go hungry . The Bank of England’s Crown created ” third world”.

  10. @ Dennis ,you want to talk about Obamacare eh? The corrupt banking health insurance heist in America is another prime example of what these banksters and their govts do.
    The banker’s president of the US passed the unlawful “Obamacare” on the poor and middle class who could not afford it … and who profits while the poor people suffer and cannot afford medical care …the same banksters that own the insurance companies at arms length .

  11. Sad that the comments have become so fact free re tax and government expenditure and the money system.

    For starters saying tax is theft is the SAME as saying paying anything for any good or service, whether public or private, is theft.

    Second, several of the commentators are blissfully unaware of the powers and features of government finances where that govt issues its own currency and borrows in its own currency.

  12. Taxes seem to be a necessary evil that we all should pay our share of. Didn’t USA reduce the tax for the bottom income people after the 1930s depression on the basis that they will spend all their income on goods and services so then all the small businesses will make more income which will add to the bigger businesses income etc. and the “trickle up” system will come into use.

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